Equity markets have continued their positive trend of late, reaching all-time highs even in the face of significant, emotionally driven volatility in recent months. The current market action is extremely positive, especially in the near term.
And at Cornerstone, we believe there is still “fuel in the tank.” Today we’ll highlight the reasons for this belief.
Furthermore, this positive market action recently clears the way for our original 2026 outlook to remain intact despite the unexpected Black Swan turmoil created by the geopolitical unrest of the Iran War.
As mentioned, this current run isn’t done. There’s no indication of this dramatic V-shaped rally letting up anytime soon:
We think this data indicates retail investors were caught significantly offsides. The two best supporting measures are:
1. Investment Company Institute data shows retail investors continued to raise cash for the last six months with no big buying.
2. The latest American Association of Individual Investors (AAII) survey shows the percentage of bulls minus bears stands at -11%, which is even more bearish than the -7% reading the week prior, even as stocks gained:
By contrast, our data indicates institutional investors caught this V-shaped rally in advance. It’s evident in the “big money” equity flows data:
Selling dried up almost overnight and buyers stepped in. This is somewhat surprising as most of the pullbacks since 2020 saw the exact opposite dynamic, with retail investors buying into the dips while institutions were much more conservative sellers until the “all clear” was signaled.
While we’ll never know the full reasons for the difference this time, our best guess would be attributed to the significant damage of retail investors’ overweight software positions, fearful decisions due to this administration’s unpredictability, and surging commodity prices (like oil).
This has led many to fear inflation returning. We are not among them based on the current lack of evidence in support of that narrative.
In fact, the significant retail cash on the sidelines represents hefty future buying power as the fear of missing out (or FOMO) begins to kick in. Of course, we're still in the “fog of war,” which means that the path to the complete end of the war is still not clear.
That being the case, we can reasonably expect periodic short-term negative shocks in the data ahead as global supplies of oil and key commodities remain disruptive. But it's becoming clear institutional investors now view those as “temporary shocks” and are seeing through those disruptions.
We can reasonably attribute this new investor clarity to the fact that every day brings further evidence that the earnings season that’s underway will be historically strong (and so far, so good).
While still early, an astounding 89% of S&P 500 companies thus far reported actual per-share earnings above estimates. This is significantly above the five- and 10-year averages of 78 and 76%, respectively.
Even better, those companies reported a beat of 10.2% above estimates, on average. That’s well above the five- and 10-year averages of 7.3% and 7.1%, respectively (and before the technology sector reported).
More importantly, the much-anticipated year-over-year earnings growth numbers have not disappointed. The blended estimate forecast for year-over-year earnings growth is now 13.4%. That’s a significant increase compared to the 12.2% estimated just a week prior.
This big one-week increase is easily identifiable. The current year-over-year earnings growth rate of companies that have reported is an astounding 30.9%:
One might say such explosive earnings momentum acceleration will be short lived. But if you want to wait for the “all clear” signal, we’ll leave you with three bullish data points to support the continuation of accelerated earnings growth.
First, and this may sound contrarian, but the fact that interest rate cuts have now been priced out of the market leads us to be even more bullish. The increase in commodity prices caused investors to worry that the Federal Reserve may hike rates to control inflation, rather than cut them.
If the “unexpected” happens and cuts occur in the latter part of the year, it would be a massive macro catalyst for stocks. While not a popular opinion yet, we believe there is a reasonable likelihood of Fed easing later this year due to the fact that the incoming Fed chairman Kevin Warsh will have a significantly more dovish bias than his predecessor.
As prices cool in the second half of the year after the Iran War, that may give him the leeway to cut rates. Historically, stocks do extremely well when rate cuts resume after a six-month pause (the Fed last cut rates in December 2025), gaining a median of 13.7% the following year:
Next, earnings growth has almost never had this level of accelerating momentum. As you can see, S&P 500 profits are now forecasted to grow 23% over the next 12 months:
That's the fastest growth rate in five years and dwarfs the 20-year average of 7.4%.
Most importantly, we can see this momentum is widespread across crucial growth engines, those being cyclical sectors like big tech and AI infrastructure:
Third, the Q1 drawdown caused valuations to become much more attractive almost overnight. That’s especially true within the all-important technology sector. For perspective, while the S&P 500 declined 10% from its January peak through March 30, the average stock in the index fell 18%.
As we've already discussed, since earnings revisions have remained strong and are growing every day, the equity price drawdown has fueled a notable valuation reset:
Note technology and communications, where historical valuation premiums to the market have shrunk dramatically. Any return by these growth-heavy groups to their historical rich valuations, even partially, will have bulls cheering from their Wall Street penthouses.
This valuation reset creates an environment where there's real money to be made. And if this year's taught us anything, it's a reminder that stocks move fast. These rotations have caught many investors off guard.
That’s why we follow objective data. Institutional investors often move early, as they did once again this time around:
Following data beats ineffectively trying to time the market. It also provides us with a clear roadmap of what to expect moving forward.
* Links to third-party websites are being provided for informational purposes only. CoreCap is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. CoreCap is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
*Past performance does not guarantee future results.
*Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial and CoreCap are separate and unaffiliated entities.